Flipboard’s Valuation Without Monetization Strategy

Over the past few months, we have looked at many new Web-based companies that have managed to deliver sky-high valuations without supporting revenues.  Flipboard is one more such company: It has a service that users like, but it has yet to figure out a successful monetization strategy.

Flipboards’s Business Model
Flipboard was founded last year by former Apple iPhone engineer Evan Doll and entrepreneur Mike McCue as the world’s first social magazine application for iPads. The service collates content from across social networks and other webites for iPad users and gives them the ability to “flip” through content on their iPad, as if it were a magazine.

Flipboard has helped to change the user interface that greets users of social networks including Twitter, Facebook, and Flickr streams and Google feeds, to name a few. For instance, when a Twitter user accesses the Flipboard app, instead of accessing feeds through links, they see the information transform into a more usable and attractive magazine-style format. In addition to configuring RSS feeds to a newspaper layout with headlines, runners, and full story, Flipboard readers can access Tweets about the story and even post their own comments.

Earlier this year, the company reported that it had more than 1 million users. Its app is the No. 2 free iPad app available for download, and it was awarded the app of the year for 2010.  Flipboard is expected to launch an iPhone version of the application by later this year. The app is free for users to download, but the company hopes to cash in on advertising and possible subscription revenues. However, as of now, Flipboard remains a zero-revenue business.

Flipboard received Series A funding of $10.5 million from multiple investors last year, including VC firms Kleiner Perkins Caufield & Byers and Index Ventures, and angel investors including Twitter co-founder Jack Dorsey, Facebook co-founder Dustin Moskovitz, Peter Chernin of The Chernin Group, Ron Conway, Alfred Lin, Peter Currie, and actor Ashton Kutcher. In April 2011, Insight Ventures and other investors funded another $50 million for Flipboard, putting its valuation at $200 million.

Flipboard’s Expanding Content Base
Flipboard has tied up with multiple publishers including ABC, AllThingsD, Lonely Planet, Bon Appetit, SBNation, SFGate, Uncrate, and the Washington Post. Earlier this month, it announced an agreement with the Oprah Winfrey Network and Oprah.com to include the first ever “Oprah” section in the Flipboard downloads. The new section will enable users to access the latest from Oprah, including reading access to O, The Oprah Magazine. Users will be able to view the launch of Winfrey’s personal Farewell Countdown Videos exclusively on Oprah.com and on Flipboard.  From its current list of 17 publishers, the company plans to ramp to more than 100 to 150 in the near future. While Flipboard works out its revenue model, it has begun to tie up with publishers hoping to be able to monetize content through advertisements and subscription models.

Flipboard has managed to compete successfully with players such as the New York Times and News Corp by releasing a successful iPad app. However, the service remains a content aggregator to a large extent. To become a revenue-generating business, Flipboard plans to use its new funds to increase scale so as to attract more publishers and subscribers. But competition is heating up, with rumors of a Google version of the Flipboard in the works and a successful launch of the app Pulse, which is known to be the best way to browse Facebook on the iPad.

I am wary of Flipboard’s valuations. The service has not only remained free but has also steered clear of advertising since its launch. It may be trying to look at both advertising and subscription models to finally generate revenues, but I doubt if a content aggregator would be able to command revenues worth the $200 million valuation, especially since the revenues most certainly will have to be shared with the publishers which actually produce the stories, photos, and so on. This model would make Flipboard’s margins relatively low. Given these uncertainties, I am not sure how McCue plans to deliver an exit that justifies at least $60.5 million worth of funding.